How Drug Rebates Influence Prescription Costs for Employers

Prescription drug costs can be a common source of confusion and frustration, with several factors influencing the price ultimately paid. One of the most significant, yet less understood, pricing components is the role of drug rebates. These rebates are negotiated behind the scenes typically by pharmacy benefit managers (PBMs) with drug manufacturers, but their complexity can make it difficult for consumers to fully grasp their impact. 

What is a Drug Rebate?

A drug rebate is a type of discount given by a manufacturer to PBMs, insurance companies, or government programs after a prescription drug is purchased. Drug rebates have been around for several decades, and continue to be an effective competitive tactic used by the drug manufacturer to help their drug get on a preferred PBM formulary tier to help increase patient access to their drug. While, modern and pass-through PBMs use drug rebates to lower costs for employers, legacy PBMs are known to keep all or part of the rebates as revenue. 

How Do Drug Rebates Work?

At the start, a PBM will negotiate a rebate with a drug manufacturer to agree on an amount that will be paid back after the drug is purchased in exchange for a place on the formulary. A rebate can be calculated based on either the price per unit of the medication or a percentage of the drug’s list price, with each drug having its own negotiated rebate value for formulary placement.

It’s important to understand that not all drugs have a rebate, such as generics. Most drug rebates are negotiated for brand-name medications in preferred tier status and have multiple drugs in the same drug class, as the manufacturer wants to have greater formulary status versus its competitors in that market. It’s also important to understand that rebate amounts vary by drug and claim. Nevertheless, the more competitive tiers will typically have higher rebates to either maintain or increase their market share access.

An Example of a Drug Rebate

To better understand how drug rebates work, let’s take a look at an example:

Brand A may offer a rebate to your PBM to ensure its insulin is included on the preferred formulary, increasing patient access. Let’s say the rebate negotiated was 20% of the medications list price, so if the list price is $500 there would be a $100 rebate paid by the manufacturer.

When an employee purchases the insulin under their insurance, the $100 rebate is paid to the PBM and then passed back to the employer. While members may not see the immediate effects of rebates, these savings can help reduce your company’s overall healthcare costs over time, potentially leading to lower premiums—assuming the rebate is fully passed through.

The Problem with Drug Rebates in regards to Legacy PBMs

The drug rebate process is very opaque and, in many cases, not aligned with the best interests of employers - especially for those partnering with a legacy PBM. For self-insured employers, drug rebates can look like reduced prescription costs, but there are downsides. Most rebates aren’t seen by an employer until months after a claim is processed - that is if the rebate dollars are actually passed through by the PBM. Additionally, the pressure created by legacy PBMs to meet drug rebate guarantees can lead to manufacturers having to increase the list prices of their medications.

One of the main issues arises from the way legacy PBMs handle rebates. PBMs are generally not required to disclose the percentage of the rebates they retain, allowing them to keep these amounts hidden from the public. This lack of transparency has led to what some call "hidden fees," or “junk fees,”  which can inflate costs without clear justification, leaving employers at the mercy of their PBMs. A 2021 report from the state of Texas, which requires PBMs to file annual reports on rebates, fees, and other payments, showed that legacy PBMs kept as much as 13% of payments from manufacturers. 

Since legacy PBMs take a cut of the rebates, they are incentivized to favor drugs with higher list prices, since they typically come with larger rebates. This means that legacy PBMs may prioritize higher-priced drugs over more affordable alternatives. As a result, drug manufacturers may raise their list prices to compete for these rebates, which ultimately inflates drug costs for patients. Furthermore, legacy PBMs may restrict access to lower-priced generics by excluding them from their formularies, leaving patients facing higher drug costs.

Given these issues, the role of the PBM becomes even more critical when it comes to managing drug rebates.

Understanding the Role of Modern PBMs in Drug Rebates

Modern PBMs, like legacy PBMs, also manage pharmacy benefits for employers and negotiate with drug manufacturers, but with a focus on transparency and real cost savings. They operate on a pass-through service model, meaning they directly transfer pharmacy fees and rebates to employers without additional markups or retaining a portion of the rebates as profit. So when a modern PBM negotiates discounts and rebates with drug manufacturers, the savings are passed directly to the employer, ensuring they are getting the best savings possible - without the hidden fees. 

Transparency is critical in this process because it ensures employers fully understand where their savings come from, including the exact amounts of rebates negotiated and how these savings are passed back to them. It’s important to partner with a PBM that is transparent about their fees and revenue streams while actively working in your best interests. Regularly evaluate your PBM to make sure they are meeting your business’ needs and that the partnership is driving a solid return on investment.  

Choosing the Right PBM: Transparency and Real Savings

Drug rebates play a crucial, yet often hidden, role in the world of prescription drug pricing. While they have the potential to drive down healthcare costs for employers, the level of savings passed on can vary significantly depending on the PBM you're partnered with. For instance, if you're working with a legacy PBM that lacks transparency, they might not pass the full rebate amount back to you, reducing the overall savings your organization receives. Understanding how rebates function and how different types of PBMs negotiate and utilize them is key to navigating the complex landscape of drug pricing.

‍Choosing the right PBM to partner with can help you create cost savings that you want to achieve. At SmithRx, we are a transparent and pass-through PBM service. We keep it simple and clear so that any revenue we receive from your drug rebate, goes back to you - 100%. Ready to take your PBM experience to the next level?Connect with us today to find out how to maximize your savings with SmithRx.